South Korea is among the few economies worldwide experiencing a productivity surge driven by artificial intelligence, although tensions between the United States and China regarding semiconductor trade may pose obstacles to this growth, according to analysts from Bank of America.
The semiconductor sector is crucial for South Korea, comprising 17% of its exports. Bank of America Global Research highlighted that the nation has emerged as a significant beneficiary of the AI boom, with exports increasing by over 50% year-on-year. Analysts believe that South Korea’s substantial investment in AI research and development, along with a rising number of AI-related patents, will enhance its position in AI adoption moving forward.
However, potential geopolitical issues could place pressure on the semiconductor supply chain, especially given the intensifying U.S.-China tensions, which could challenge AI development in South Korea. While South Korea has diversified its chip exports away from China to other regions, over 30% of its chip exports in 2023 still went to China and Hong Kong, with a similar percentage directed to the United States.
Bank of America analysts cautioned that if geopolitical conflicts escalate, particularly with the U.S. imposing additional trade restrictions on advanced or AI-related chip exports to China, it could severely impact South Korea’s memory semiconductor exports.
Furthermore, South Korean chip manufacturers rely on China for various components and equipment necessary for chip production. Disruptions in the supply chain due to rising tensions could hinder South Korean companies from obtaining essential tools for chip manufacturing.
Reports indicate that the U.S. has requested South Korea to limit exports to China of equipment and technology used for producing memory chips and advanced logic chips, specifically those more advanced than 14-nanometer and DRAM memory chips beyond 18-nanometer. South Korean officials are reportedly considering this request due to potential impact on major South Korean companies like Samsung and SK Hynix, which operate in China, South Korea’s largest trading partner.
In a related development, the Biden administration is contemplating the implementation of an export control known as the foreign direct product rule against allies that continue to supply chipmaking tools and equipment to China. This rule would restrict exports of goods to any country if they are manufactured with a specified percentage of U.S. intellectual property components.